Farmland still good investment, with farms on solid footing

Demand for farmland remains strong, and recent land prices are fundamentally sound even after several years of surging prices, farmland auctioneer R.D. Schrader told farmers, farmland investors, bankers and others in a series of updates on the current market.

“Farmland values may have attracted a lot of attention during the past few years, but those with a longer frame of reference understand that we didn't get here overnight. Farmland values have gone up in 25 of the last 26 years, and yet valuations continue to be well founded,” said Schrader.

He reviewed data from a variety of sources, including the Chicago Federal Reserve Bank, the National Agricultural Statistics Services, Purdue University and Iowa State University, showing that while some states and time periods were weaker than others, the overall upward trend remains intact.

Much of the increase during 2013 occurred during the first half of the year, he acknowledged. Even so, the Federal Reserve reported a 6 percent increase through Jan. 1, 2014, in the price of “good” farmland for the five states in the Seventh District (Illinois, Indiana, Iowa, Michigan and Wisconsin). The only state in the district showing a decrease for the year was Iowa, for which the Federal Reserve noted a 2 percent decline for the entire year.

“America's farms are on a solid footing. It's been farmers, the operators, that have been driving this market. It wasn't 100 percent financing that got us here,” he said.

“Debt-to-equity ratios are in a 10-13 percent range – as low as they've been in the last 50 years,” said Schrader, also noting that debt-to-income ratios are “awfully good, though changes in income and farmland values will change those ratios.”

Schrader said softening corn and soybean prices may be a challenge to farm incomes going forward. “Volatile corn prices, especially, have been a concern, with current prices very close to the breakeven point for many farmers. While some operators may struggle with income fluctuations, the industry as a whole remains strong. The dynamics today differ starkly from those of the 1970s leading into the 1980s,” he said.

Among other factors that tend to impact farmland prices, interest rates remain at historic lows and government support for ethanol is likely to continue at current levels, he said.

“The big elephant in the room as far as demand goes is these world populations and rising incomes,” said Schrader, citing figures showing that by 2050, the world population will require a 100 percent increase in the world food supply. “Growth in other countries' populations and wealth will have a big impact on the demand side for U.S. agriculture. On the supply side, it will be interesting to see how the technology keeps production growing to meet demand,” he said.

In evaluating values achieved in recent sales, Schrader said it's important to be mindful of the soils and productivity of a given farm.

“It's critical to get an apples to apples comparison. We've had a lot of cases where people compare farms in a specific county without taking into account the difference in soils,” said Schrader. To illustrate his point, he pointed to three adjacent properties sold by Schrader on the same day – Nov. 15, 2012 – in Pulaski County, Ind. The best land sold for $10,576 per acre, while the tracts with more trees or poorer soil brought $4,500 per acre and $4,083 per acre.

“This was the same auction company, with all the same buyers, with all the same money in their pockets,” said Schrader. The tract with sandy loam soil, he said, brought more than twice a neighboring tract with poorer soil.

Schrader Real Estate and Auction Company is based in Columbia City, Ind.